Early signs of another commodity price up cycle are beginning to appear. But construction materials prices will probably ebb slightly lower in the next few months before this takes hold. The next surge in materials prices is likely to be somewhat smaller than the 10% jumps over eight months in both 2004 and 2008.

The economic environment a few months ahead is very similar to the conditions that set off commodity price surges in 2004 and 2008 except that there is more surplus commodity supply capacity in 2009 at the end of a very deep worldwide recession. The consequence of this is that the period of rising construction materials prices could last longer as surplus capacity is absorbed while accumulating at most the same percentage price increases.

The similarity between the three time periods is a declining $US as well as an abrupt turn up in manufacturing and construction activity in both industrial countries as well as in China and other large developing countries. Later this year, as in early 2004 and 2008 suppliers could be caught in a position of slim inventories, shuttered capacity and a significant rise in demand that they are unable to meet on the schedules of customers who have become used to quick deliveries that allow them to keep minimum inventory.

Commodity suppliers typically earn all of their profits for each business cycle in a short 2-3 quarter period of constrained supplies during which they boost prices sharply. The are eagerly waiting for the next period of constrained supply which they now expect at the tail end of this year and the early part of next year.

Construction materials inventories are at a very low level — even if high compared to current sales — and still falling. US materials manufacturers have been cutting inventory since December. April inventory was 7% below the January 2008 level when suppliers last were able to raise prices to ration scarce supplies.

These are the signs of an imminent turn up in materials demand. The consensus US economic outlook has improved to a late summer end to the recession with the turnabout largely driven by rising production for both housing and motor vehicles, the most commodity intensive industries. For example, US housing starts are projected to increase 17% from spring 2008 to winter 2009. The rise in motor vehicle production could be larger.

The last two price surges were widely blamed on increased Chinese demand. Again, the Chinese economy is set to notch up to a higher level with overall GDP growth moving from about 6% to about 9% which means an even larger increase in goods production and hence materials demand.

The World Bank predicts world GDP growth to move from slightly negative early in 2009 to +3.0% in 2010.

As in the last two price surges, metals will have the largest price increases. And price increases will be significant also for petroleum products and plastics materials. A Several months after the price surge begins — about late winter or early spring - smaller price increases will appear for material manufactured from metals and petroleum products.